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Higher Restaurant Prices on the Way

Restaurant owners are likely to follow the lead of grocery stores in raising prices, new Bureau of Labor Statistics data shows.

October 30, 2011, 08:00 pm

NEW YORK -- Restaurant goers may soon have to review their budgets for eating out. New data from the Bureau of Labor Statistics' monthly consumer-price index shows that inflation of take-home food prices has increased faster than out-of-home prices, which could prompt restaurants to charge more, according to a Bloomberg report.

Average restaurant prices rose 2.6 percent this September, while grocery store prices rose 6.2 percent, paving the way for restaurant operators to follow suit. Overall food prices increased by 8 percent over the last year, as of September. But commodity costs make up a larger percentage of expenses for stores than for restaurants.

"If people go to the supermarket and see that the core items they're purchasing are on the rise, then they are less likely to be surprised if restaurants are raising prices as well," said Barclays Capital analyst Jeffrey Bernstein.

The Standard & Poor's Supercomposite Restaurants Index has risen 58 percent since Dec. 31, 2009, while the S&P 500 has risen 15 percent, according to Bloomberg, and further outperformance is likely to occur in the future due to restaurants' ability to increase prices.

Fast-food king McDonald's may act as an industry leader in terms of pricing changes. The chain boosted its prices by 1 percent in March, and then again by 1.4 percent in May, with no fallout in terms of customer visits. Domestic sales grew 4.4 percent in the third quarter of this year, according to the company.

Along with consumer expectations, moderate growth in employment and income is another reason restaurant operators may feel comfortable raising their prices, stated Barclays' chief analyst Dean Maki. The U.S. Labor Department found that employers added 103,000 workers in September, more than the amount forecast. And Bureau of Economic Analysis data shows that personal income rose at an annual rate of 4.4 percent the same month for the 21st month in a row.

When prices do increase, fast-food restaurants may see the best results because their prices are already closer to take-home food than dine-in restaurants', according to the report. Restaurants in general, though, must be careful to avoid alienating customers with price increases and may consider options such as reducing promotions or highlighting certain menu items. "They can't be too aggressive," restaurant strategist Todd Hooper told Bloomberg.

If the experiences of fast-casual players Chipotle Mexican Grill Inc. and Panera Bread Co. are any indication, restaurant operators have less to fear. Chipotle raised prices by around 3.5 percent in the third quarter with no negative effects, while Panera raised its prices by 2.5 percent earlier this year and had a 3.5-percent increase for the fourth quarter, plus the chain saw systemwide sales go up by 4.4 percent over the 13 weeks that concluded Sept. 27, according to the report.